Furniture is basically a necessity in the modern age. Whether it is a recliner, a sofa or any other product, a piece of furniture serves as an important decor for any interior and it provides convenience, comfort and style to any residential or commercial property in which it is located. . While this may not seem like the most attractive space to invest in, some market participants have shown stability over the years and are trading at levels that should be considered generally attractive. One of these companies is a company called La-Z-Boy (LZB). Although the company’s financial performance has been somewhat mixed in recent years, the general trend has been positive. Add to that how cheap stocks seem today, even relative to the competition, and it should be a great prospect for long-term value investors.
Today La-Z-Boy describes himself as the world’s leading manufacturer of recliners. Additionally, the company is a manufacturer and distributor of residential furniture in the United States. It sells its products through a variety of channels, including through its La-Z-Boy Furniture Galleries retail network, which is currently the third-largest single-brand furniture retailer in the country. The Company also retails its own and third-party upholstered furniture products under different names. These names include his brand La-Z-Boy, as well as England, Kincaid and Joybird. Other products it sells include retail accessories and storage items (referred to as wooden furniture) under various trade names.
At the end of its last fiscal year, the company had five main manufacturing sites and seven regional distribution centers in the United States. It also has three facilities located in Mexico. This all adds up to a logistics company that distributes some of its products in the United States, with other products sold internationally. Its footprint includes wholesale distribution operations in the UK and Ireland, as well as some operations in Hong Kong. In total, the company sells its products in no less than 65 countries around the world. But that doesn’t change the fact that its greatest exposure is to the US market. According to management, 91% of the company’s overall sales are destined for the American market. 5% goes to Canada, and another 4% is attributable to other countries around the world. The bulk of the company’s sales, approximately 63.7% in total, falls within its wholesale segment. Most of the rest, around 30% of total sales, comes from its retail business.
In terms of physical distribution network, the company currently has, at least at the end of its last quarter, 351 La-Z-Boy Furniture Galleries stores, as well as 560 La-Z-Boy Comfort Studio locations. It’s worth noting that 159 of its La-Z-Boy Furniture Galleries are company-owned, with Rust being independently owned and operated. Meanwhile, all 560 La-Z-Boy Comfort Studio locations are independently owned and operated. Also of interest is the size of its physical footprint from a square footage perspective. In North America, it has 7.8 million square feet of floor space dedicated to the sale of its brands. This is in addition to 3 million square feet of space outside of the United States and Canada.
Over the past few years, the company’s financial situation has been largely positive. Between 2017 and 2021, for example, the company’s revenue grew from $1.52 billion to $1.73 billion. This growth continued in fiscal 2022, with sales in the first half of this year totaling $1.10 billion. That compares to $744.6 million generated a year earlier.
On the earnings side, we have seen a similar trajectory. Net income increased from $85.9 million in 2017 to $106.5 million in 2021. Operating cash flow increased from $148 million to $309.9 million, while the adjusted equivalent, which takes into account changes in working capital, would have gone from $122.3 million to $149.1 million. During this time, EBITDA was much more limited, oscillating between a low point of $170.6 million and a high point of $185.2 million. In 2021, that figure was $182.4 million. For the current exercise, things are definitely looking up. Net income for the first half of 2022 was $64.1 million. That compares to $39.7 million generated a year earlier. Operating cash flow fell from $195.7 million to $15.4 million. But if we adjust for changes in working capital, it would have gone from $95.9 million to $119.8 million. And EBITDA also increased from $109.9 million to $147 million.
Stocks look cheap
Management has not provided any real guidance for FY2022 that I could find. But if we analyze the results seen so far in 2022, the net profit should be around $172 million. This pegs operating cash flow at around $186.3 million and EBITDA at around $244 million. By taking this data, we can effectively assess the business. On a futures basis, the shares trade at a price/earnings multiple of 9.4. This is an improvement from the 15.1 we get if we rely on the 2021 figures. On a price/adjusted operating cash flow basis, the multiple is 8.6, down from 10 .8 that we would get if we used 2021 numbers. And using the EV to EBITDA approach gives a multiple of 5.4, compared to 7.2 if we used 2021 data.
To put all of this into perspective, I decided to compare the company to the top five rated of its peers, as defined by Seeking Alpha’s Quant platform. On a price/earnings basis, these companies ranged from a low of 9.5 to a high of 24. Our outlook was the cheapest of the bunch. I did the same using the price vs. operating cash flow approach, which gave a range of 6.4 to 47.1. Two of the five companies were cheaper than La-Z-Boy. And finally, I repeated this analysis for the EV to EBITDA approach, which gave a range of 5.2 to 18.4. One company was cheaper than La-Z-Boy, while another was related to her. Some investors might argue that leverage could hurt the business, thus justifying a lower trading multiple. It would be okay if leverage was an issue. Currently, the company has $296.6 million in cash and no debt. The overall risk for shareholders is therefore now very limited.
|Society||Prizes / Earnings||Price / Operating Cash||EV / EBITDA|
|Ethan Allen Interiors (ETD)||9.5||6.4||5.4|
|Tempur Sealy International (TPX)||14.8||11.6||10.9|
|Dorel Industries (OTCPK:DIIBF)||10.2||10.9||5.2|
|The Lovesac Company (LOVE)||24.0||47.1||18.4|
|Mohawk Industries (MHK)||11.0||8.0||6.6|
To take with
Based on the data provided, I think La-Z-Boy is a solid furniture opportunity. The company has a global reach, although it is undeniably focused on the US market. Although financial stocks were somewhat mixed in some respects, the overall trend was positive and stocks are trading at levels that should be considered cheap on both a relative and an absolute basis. All of this points to a bullish outlook from my perspective.